Most business owners do their best to be diligent about collecting taxes and filing accurate sales and use tax returns, but there’s a lot to know — and mistakes naturally occur. Let’s take a look at some of the most common missteps that business owners make in sales and use tax collecting and reporting.
Start with the essentials
The first step to getting it right is understanding the difference between sales and use tax. Sales tax refers to a tax imposed on retail purchases. It applies not only to goods, but also some services. Use tax applies to items on which sales tax has not been paid, but are being used in a certain state or area. For example, use tax could apply to vehicles that you purchase from a private individual or items bought from a vendor in another state that didn’t charge sales tax. But even if you know all about sales and use tax, you can still make mistakes and tricky issues can crop up. Here are just a few common pitfalls for businesses that need to collect sales and use taxes:
- Not being exactly clear on who’s exempt: You do business with charitable organizations, but do you have proof of their tax-exempt status? Make sure you have the documentation you need.
- You haven’t set aside revenues to cover tax payments: It’s easy to get sidetracked and caught up in meeting daily expenses so you can keep your regular operations going. But if you don’t plan ahead for paying sales and use tax and set aside the taxes you collect from customers, you’ll have to scramble for cash.
- You don’t have the best understanding of how nexus works: Maybe you’re located close to the state line and do a lot of business with clients just over the border in another state. That can create nexus — a situation in which instead of filing sales and use tax returns in just one state, you’ll need to file in both. And if you do end up needing to file in more than one jurisdiction, you’ll need to verify the filing deadlines, which can vary from state to state.
Those are just a few of the issues business owners can face when dealing with sales and use tax. Fortunately, the U.S. Small Business Administration offers an in-depth guide1 to sales tax, who should collect it, and from whom and when it should be collected.
Finding help for your sales and use tax questions
But even with so much information available online, small business owners — especially online-only retailers that regularly deal with customers in a wide variety of locations — can still make mistakes when it comes to sales and use tax. So how do you stay on top of it all? You need to find a local tax expert or legal counsel who knows about the specific sales and use tax requirements for your state, county and city. A few pieces of advice on choosing a tax expert:
- Look for an expert who has appropriate certifications. For example, a law firm should have least one attorney is an LLM and which deals exclusively with tax law matters.
- Check to see whether the expert or firm is in good standing with state associations and the Better Business Bureau.
- Ask whether the expert you’re considering has a lot of experience dealing with both the IRS and the local tax authorities.
- Make sure the consultant you choose understands not only business taxes, but how your business works.2
Finally, be sure the consultant can communicate clearly with you and answers your questions completely without talking over your head. Even the best advice is no good if you don’t understand how to apply it to your situation.
Forewarned is forearmed! If you’d like to educate yourself so you can better recognize and deal with business issues as they arise, MSCCM can help you connect with an Industry Group in your area. Please contact us at 303-806-5300 or email us at firstname.lastname@example.org if you would like a meeting for your specific industry.
- U.S. Small Business Administration. “Sales Tax 101 for Small Business Owners and Online Retailers.” Accessed June 15, 2015. https://www.sba.gov/blogs/sales-tax-101-small-business-owners-and-online-retailers
- Optima Tax Relief. “How to Find a Good Tax Attorney.” Accessed June 15, 2015. http://optimataxrelief.com/how-to-find-a-good-tax-attorney/